Your locus of control & Financial Planning
I’m about half way through reading an interesting book called The Organised Mind by Daniel Levitin.
“This book will take you through every aspect of modern life, from healthcare to online dating to raising kids, showing that the secret to success is always organization. Levitin’s research is surprising, powerful and will change the way you see the world.”
One interesting chapter discusses the concept of ‘locus of control’.
This is the fancy way of describing how we view our autonomy and agency in the world.
The author explains that people with an internal locus of control believe they are responsible for, and can therefore influence, outcomes in their life.
Those with an external locus of control believe they are relatively powerless pawns in the game of life, with external events having the most influence on their lives.
Levitin says that most people fall somewhere between these two extremes of internal and external locus of control.
Research has found that locus of control is a significant factor when it comes to life expectancy, life satisfaction and work productivity.
It made me wonder whether locus of control plays an important role in our financial success too.
The book gives the example of how locus of control shows up in gambling behaviours; people with a high external locus of control are more likely to believe in ‘luck’ and therefore take on riskier bets.
This then could apply to making investment decisions too; if you have a high internal locus of control, you are more likely to believe that the outcomes from your portfolio are within your control, by virtue of the risk you take with your money, the asset allocation decisions you make and how you decide to react to market volatility, for example.
Levitin says that locus of control appears to be a stable internal trait, not significantly affected by experiences.
From a Financial Planning perspective, this is positive for those born with a high internal locus of control, who experience poor financial outcomes during their lifetime, but problematic for those with a high external locus of control; their outlook on financial matters is unlikely to change during their lifetime regardless of being exposed to positive examples of self-determination.
What particularly interests me about this concept is that locus of control is measurable.
With those displaying a higher internal locus of control likely to better adopt and believe in the success of a Financial Plan, it raises the question whether we should be testing for this trait at an early stage of our client engagement process.
I would argue that the majority of our clients have a high internal locus of control, with the belief they are responsible for, and can therefore influence, outcomes in their life.
This would seem to fit with a desire to develop and follow a Financial Plan to achieve their goals in life, as those with a high external locus of control would surely believe financial success (or otherwise) is something outside of their determination.